SAN FRANCISCO -- Is Saville Systems (SAVLY) in play? That's just what some analysts and investors are thinking after reading the tea leaves of the stock's recent trading pattern. Shares of the billing-software company have risen 121% since April 7 -- defying even Monday's tech plunge -- in unusually heavy volume.
This week, options activity has
heated up, with traders scrambling to buy calls. Unusually aggressive call-buying often indicates that a takeover is in the works.
In addition, block trades of 10,000 or more shares, a strong indicator of institutional activity, started to pick up around the middle of March. Block volume in Saville made up more than a third of its total volume each day during the week of March 15,
says, though it has slipped since then. Institutional activity is considered less speculative than retail trading and can signal that rumors of a Saville takeover, which have been floating around for some time, are being taken seriously by more conservative money.
A Saville spokeswoman said she did not know the reason for the recent run-up in the stock price and declined to discuss any speculation of a takeover.
Saville's Building Blocks
Another clue to investors that something's brewing at Saville is the dearth of insider trading since November. Insiders at companies in talks with suitors can't buy and sell the company's stock because of laws prohibiting insider trading. Saville hasn't seen any insider activity since about Nov. 25, the longest stretch since Saville ADRs started trading on Nasdaq in November 1995, according to
Meanwhile, Saville's stock has tumbled from 27 in January to below 10 this month, a level that may strike suitors as attractively low. All these indicators point to a buyout scenario, analysts say. "I would say the likelihood of a takeover is 90% to 100%," says Doug Ashton, analyst at
Jefferies & Co.
, which hasn't underwritten for Saville. He says the chances of a Saville buyout increased after the Galway, Ireland-based company preannounced an earnings shortfall March 7, which sliced 40% off the stock price in a day. The stock hit a low of 5 1/4 and closed at 6 1/4 March 7 after Saville said it expected to report a first-quarter loss of 5 to 9 cents a share, compared with
's consensus estimate for a profit of 24 cents. Saville is expected to report earnings on April 27.
"When the stock was trading around 13
before the preannouncement, a buyer may not have been able to offer as much of a premium as it could when the stock fell to 5 after the preannouncement," Ashton says.
Nor would a takeover come as a surprise.
has set precedent for consolidation in the billing area.
Brian Skiba, analyst at
also noted in a research report the day after Saville preannounced that "Saville management indicated today they may also be part of that consolidation, as they continue to consider all of their options." Lehman has not underwritten for Saville.
However, if Saville were bought out, analysts believe the buyer is less likely to be a major equipment vendor like Lucent. Instead, they say, possible suitors include
and European systems integrator and outsourcing firm
Dave Raezer, analyst at
NationsBanc Montgomery Securities
, says a tie-up with Sema Group would make sense. He says the company has the cash needed for an acquisition after disposing of its 50% stake in Sema Group's U.K. defense joint venture in September 1998 and that Saville would be a natural fit for Sema's business. Saville's billing solutions for wire-line communications would complement Sema's wireless presence to offer customers a complete solution for telecommunications billing, including consulting, he says. (NationsBanc Montgomery Securities participated in Saville's initial public offering in 1995.)
In addition, Sema has said it wants more exposure in U.S. markets. Though Sema didn't return phone calls to discuss its strategy, the company's Web site says: "We are now becoming a significant player in the U.S.A. since operations started in 1997. We are continuing to look for opportunities in this country to complete our global coverage." The U.S. represents 3% of Sema's business now, according to the site. With Saville, which has a major customer base in the U.S. that includes such companies as
, Sema could quickly increase its U.S. exposure, analysts say.
Raezer says a Saville buyout for $20 per share would be equivalent to about five times revenue, which would be reasonable considering that Lucent paid 8.5 times for faster-growing Kenan. Kenan says revenue grew about 80% last year from 1997. That compares with 57% year-over-year growth for Saville.
But Ashton of Jefferies says he doesn't believe the buyer will be Sema. "Those rumors have been around for a long time," he says. Instead, Ashton says his sources are telling him the buyer could be ADC Telecom. Raezer of Montgomery says such a match would surprise him because ADC is a low-end supplier and would not fit the buying pattern established by the Lucent-Kenan deal. "I would be blown over if the buyout company was them," Raezer says.
After doing some research, Ashton says an ADC-Saville link makes sense. "ADC is a big infrastructure provider and already has a small interest in an Israeli billing company," which shows ADC has an interest in this area, he says. He says a Saville acquisition could help raise ADC's profile in the billing area. ADC didn't return calls for comment. If Saville gets bought, Ashton believes a fair price would range from 10 to 20 a share.
If a deal is in the works, the acquiring company could risk a rising stock after earnings if Saville delivers a positive surprise, Ashton says. That would either shrink the premium in a purchase or force the acquiring company to pay up. But Ashton adds, "I doubt there'll be much good news."